Avenue Supermart: a compounding machine?

Sir, Dmart profit reduced to reduction in Gross Margin (effect of price cut)and pre loading of expenses. If its growth really linked to NBFC crisis then how revenue grew at @33%?

Hi @bheeshma ,
I want to calculate the reinvestment rate percentage of Dmart’s , How to know that from above caluclation ? I cant 'take simple Incremental capital/PAT as DMART used IPO money / Debt for employing capital.

(Prior period PAT - Current PAT)/(Prior period Working capital + Fixed assets) - (current WC + FA)

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Hi @bheeshma

Above formula is giving negative figure, Instead if I use (portion of NOPLAT invested back into business)

invested capital(t+1) - invested capital capital(t) /NOPLAT(t+1)

For Fy2018 , it is

=(4098-3202)/926
=97%

Edit : Corrected Formula

There are many threats to a high PE stock. Unless the company has a unique product which no other company can compete with, kind of monopolistic or duopolistic environment, high PE story is not likely to be a long one.

JIO killed the entire Telecom market… Now let’s see what happens in retail.

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I totally agree with you, High PE stocks are too risky an investment because as the intensity of competition increases it becomes difficult to maintain high rate of profit growth.

Reliance Retail - Quarterly Revenues ~ 36,000 crores. Number of stores 9907. Average Revenue per store = Rs 3.6 crore per quarter. Reliance Group Net Profit. Total EBITDA = Rs 22,000 crores. Total Debt = 320,000 crores. Total Debt/Yearly EBITDA = 320,000/80000 (extrapolated from one quarter) = 4.

DMart - Quarterly Revenues ~ 5,450 crores. Number of stores 164. Average Revenue per store = Rs 33.2 crore per quarter. Total EBITDA ~ Rs 470 crores. Total Debt ~ 500crores. Total Debt/Yearly EBITDA = 500/1900 (extrapolated from one quarter) = 0.26.

From the number we see that financially DMart is performing much better than the retail arm of Reliance. Reliance has a much greater leverage in terms of scale. Its total EBITDA is about 40 times that of DMart and will remain thus for some time. Its debt is also 500+ times more but they are quite capable of servicing it.

I do not know if Reliance Retail gives a break-up of the store types. From lat years annual report I could see that there are about 523 Reliance Fresh stores which may have gone up to 700 now. Then there is something called Reliance Smart whose numbers I do not know. Their last years annual report says Reliance Digital has 7000 stores. I think this includes both the electronics store and the Jio stores.

Reliance is the largest retailer and DMart is the most successful in India. If we look globally the DMart model has come up more successful but it does not guarantee anything in India. I think there is going to be two way customer poaching. For Reliance the 164 locations of DMart are good poaching grounds for customers. Similarly the 1000 Reliance Fresh and Smart stores are good poaching grounds for DMart. My observation is that wherever DMart goes, smaller(or other) retailers like More, BigBazaar, etc close shop. I have not yet seen the reverse happening. Now this is purely anecdotal and there is no empirical data to support this.

The strength of Reliance Retail are the following -

The parent company throws out 80,000 crores of EBIT every year. Hence Reliance is much more aggressive in opening new stores in newer locations.


2. ```
As the scale of operations increase their leverage with suppliers increase. Probably lower cost and longer supplier payment cycle.

Reliance Jio gives them an advantage in terms of technology. Probably tech savvy customers will move to the more advanced Jio platform for their shopping. But from experience I have observed that PoS is much more easy at DMart. Even with their primitive PoS systems I never experienced a single mistake in their check out process. Reliance with all technology is way behind.


4. ```
Ego of promoters. To become number 1 Reliance can throw cash at the problem at a scale DMart wll not even be able to dream of. Reliance can throw profitability to the winds and the shareholders will not bat an eyelid.

The weaknesses of Reliance of which some are strengths of DMart.

  1. Per store revenue is much less compared to DMart.
  2. Many stores are smaller and hence does not cater to the monthly grocery needs of many families. I faced this issue and stopped going there since the new store at Kharghar is too limited for my monthly grocery shopping. Other locations may be better.
  3. Fruits and vegetables - I may be wrong here but the amount of wastage could impact profitability in a business where the net margins are 5-8%.
  4. They open in newer locations which opens up the market. DMart can later come and set up a store and poach their customers. This happened for More and Biz Bazaar in Kharghar. Reliance can also do the same but then the poaching ground is smaller.
  5. Reliance Retail is into many luxury brands. Most of the luxury brands will not perform so well in India for some time into the future. Even Hamleys are deserted these days.

I do not know who will survive to write the story of Indian retail. Kishore Biyani wrote his story a little too prematurely. Let us watch Dmart and Reliance closely.

I feel if done well a diverse nation like India will have space for more than a few retail giants.

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I was a regular at Dmart as it is only 500 mtr from my home. I have been using it since 2007. I have seen it emerging, changing, upgrading and doing extremely well over the years. I also did some product supply to it so you can say i know a little bit how they are at procurement also. As we all know Dmart’s power is in its FCF generation, Asset turnover ratio, inventory management and satisfying customer and suppliers simultaneously. I have been to Big Bazaar , More, Reliance fresh and now shops Online because of the rush i face even on weekdays or any day any time at Dmart. Some problems i have faced as a consumer and corrective measures Dmart has taken to solve my issues are commendable from a customer points of view. I am elaborating my facts in pointer please bear with if there is some flaw in my observations:

  1. Rush at Store is increasing Day by day. Earlier people use to shop at starting of month but now when many of us have credit card we dont want to wait for salary or we can shop now any day in a month. Solution: Dmart has extended store timings to 8 am to 11 pm i.e increase of 3 hours.
  2. In only last 3-4 years i have noticed the store manager at the store floor earlier it was not the case so manpower cost is increasing for it. Increase in store opening time has also increased the manpower cost as you would need more people at same store in shifts.
  3. It has increased discount from 6% minimum to 7% minimum and also started to ran promotional offer for credit card holder or can say for specific customers. It wasn’t the case earlier i have never seen any credit card or debit card offer clubbed with Dmart. This must have increased some expenses.
  4. No space to freely move or shop and worst was to stand in 10 mtr long que at peak hours but now they have doubled the billing counter where i shop. They have also made the billing very quick, their slogan is no more than 4 persons at billing counter if it is so then click photo and send to them. That is impressive look how they are solving the problem.
  5. Earlier there was a vegetable counter which was not profitable and very difficult to run it needs a lot of quality check and a lot of manpower is involved in this. Now they have shut it down space is given to more FMCG products. Again good step to improve.
  6. I have read and seen many a retailer doesnt find it viable to operate once the real estate price shoot up. But Dmart owns it land which is acquired way before the development. This is also a good step for any retailer to follow.
  7. I am worried about their parking management at its store after a particular point no more people would like to park their vehicle 1 km away from store and shop. It will be very difficult to generate more sales if parking is going to restrict the entry for its customer. I thing this can be a bottleneck for its growth at these stores if it is not addressed well. To some extent fast billing can improve it but not much. So concern of their same store growth rate will be a thing to look out for.
  8. A lot of or i were to say maximum of the non-FMCG items are imported from china so how it is going to effect its profitability growth is also a point.
  9. I have no doubt about the managerial prowess of its promoter and top management level but the real growth will come from new store opening and if they slows it down due to any issue then there is problem to be worried about.
  10. They have moved to online platform very intelligently and move is also gaining traction but will it be successful or can drive sales in other non metro cities?

Please comments on my above post. I am here to learn.
Discl: No holding.

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It is very difficult to continuously grow the same store sales at initial rate after 8 to 10 years.
You are absolutely right that growth would come from new stores.
As Dmart is very careful about location, land price, D/E ratio etc. new store opening growth rate would come down drastically going forward hence growth in sales & profits. I believe growth rates for next 10 years would not be comparable with last 10.

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Hi Ravish,

The minority shareholders are convinced that Dmart is a good business. One of the best around. But, all that is already factored into the price.

Now the real question is will there be a 30% growth going forward? Because at PE 98, that is what you are paying for!

It has 164 stores, will the management be able to add stores and increase efficiencies of the existing ones, to exhibit a 30% growth in EPS YoY… each year, is a big question !

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IMO, high PE is also because of high visibility of future earnings (protected by “low cost” moat)

The DMart store near my house - Dahisar in Mumbai - is always crowded. Shopping is a little more convenient from 8 to 9 or after 9.30 pm. The store which is six-seven years old appears run down with merchandise stacked above the shelves to allow more room for shoppers. They have increased discounts and were also accepting PayTM till December-end. But they have discontinued this now.

Despite Reliance Retail giving more discounts, I find DMart cheaper in many categories. But Reliance Retail is expanding majorly into house brands which are far cheaper, example - pasta. DMart has its house brands in cooking oil and some products which are also very competitive.

I notice that DMart ready has opened five to seven kms from the mother store in Dahisar where people can pick up stuff ordered online. However I hardly see crowds at these outlets.

disclosure: no holding

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No doubt about the rush there in Dmart, I am only worried about the margin decline from 10 to 8%. The management says that they are not going aggressively then why they need to lower their prices even more to derive up sales if they are already the best. As an investor I need profit growth to survive at these valuations what in my opinion is that it is difficult to again be on back at 10%.

Technically the gap down of 9% recently on a good volumes speaks the same. It might just be a start of valuation correction

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Perfectly captures the observations. Same things are observed in the Dmart store near me in Pune. There is rush in the store but billing counters are quick and no more than 4 people at counter. Reliance fresh has same issue of long queue at the billing counter but not action taken… it continues to be same.

Dmart has increased the same store growth by extending the time. On saturday/Sunday they open early.

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While a lot of debate has happened and will consistently happen over the extremely high valuations of D-Mart; nobody can really make out what should be the right P/E multiples- if it is 50 then why so? In my opinion PE as a parameter is the most distorted way of valuing a stock; of course, profit margin reduced by 2% and that’s a reason for concern; but DMart encountered the same in the past as well and rebounded back handsomely.
Now coming to “on the ground” and " Buy what you see" approach of Peter Lynch: almost everybody concurs without any doubt that if there is a D-mart, there are no chances of any competitor suviving in the nearby vicinity of 1 to 2 kms.I have experienced the same personally in Thane,Mumbai area- Reliance and More had to close their outlets which were nearby(there may be some other factors though, but I have never seen a D-Mart closing at any place); such is the moat and value provided by the company.
In the earlier posts, someone compared with Reliance retail: we need to visit Reliance megastores to realize the difference in quality, variety,billing counters experience,rates etc vs our company.
Comparing D-Mart vs Reliance is like “doing one thing thousand times” vs doing “thousand things one time” :slight_smile:
The management has passion, vision, experience and funds to identity and overcome the challenges forward. Some of the initiatives like lease model(for new stores), faster increasing online presence(beyond Mumbai suburbs) are low hanging fruits which the management would for sure be looking at.

Disclosure: I have Dmart as 10% in my portfolio and thus views may be biased.

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Dmart should also open large store formats which have large parking and i think it wont be impossible for them do some few hundred crores of sales per year from those stores. Also i dont know how their franchise models works? If it works on commission or royalty basis then again the profit would increase on its expansion without any balance sheet load. I read today only how much revenue Ola and Uber are having yearly and it was very disappointing for me to see only 1500 crore and 500 crore is clocked by them and the money they are spending or say loosing is huge. Their model is perfect for Metro cities but wont be profitable in other cities. In case of Dmart even a District and Taluka level can give revenue more than lakh crore despite all the current sellers doing business. I have seen how a taluka place is changing in terms of packaged foods, just start from Flour,spices, surf, tea and many day to day items. Market is very huge and is expanding more than ever but how will they tap this Taluka size market will be a key to their growth. I hear from one of my friends Dmart is looking for place in talukas. Damani is outstanding is very though full of what he is doing and one should also notice than he is a outstanding Investor which sets him apart from other businessman as he knows better about a profitable business sense. My take on current situation is very basic it is not giving any margin of safety and the results it has given also creates short term doubt. It is better to watch is and jump with all guns blazing when a significant correction in price.
Discl: No holding.

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A very balanced article articulating all the reasons why and why not online grocery shopping works/will work. Great to see that India has one of the ingredients needed to make this work.

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Beautiful article indeed.
But demographics are different- US and India; while the population density in Indian cities is much higher than the US, at the same time logistics and supply chain is equally horrible.
Indian online grocery market is still in a very nascent stage and with FDI compliance rules, firms thinking about profitability, it will be much more difficult to sustain the online grocery model.
In my opinion, the main driving force to buy grocery online is the discounts given by players.Once it dries down, it will be difficult for these players to sustain.Indians prefer buying grocery after touch and feel.
Recently,paytm mall whose major source of revenue was grocery section, suffered a decline of almost 80% in sales, the moment they stopped cashback/discounts. Given the number of players available as alternatives(big basket,amazon now,flipkart,grofers), it did not even take customer a month to switch loyalities- such is the bad market; till the time you are providing discount and freebies I am with you :slightly_smiling_face:

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